But what
does that research involve, exactly? That’s what we’re going to cover in this
tutorial.

The first
two tutorials were about understanding how franchising works, and generating a
shortlist of promising opportunities. In this one, we’ll take you step by step
through the process of researching and evaluating each opportunity on that list.
We’ll show you how to assess the business plan, what questions you need to ask,
what extra research to do, and we’ll list some common mistakes to avoid.

Before
making a final decision, you’ll also need to read and understand the Franchise
Disclosure Document (FDD) and the franchise agreement. These documents are so
important that we’re going to cover them in a separate tutorial. For now, we’re
looking at all the other research you can do beyond reading those documents.

Step 1: How to Evaluate
the Business Plan

The first
step is to understand the business plan you’re buying into. You should be able
to gather a lot of this essential information from the franchisor’s website or
from other materials they provide.

At a very
basic level, how does the business make money? If it’s a simple retail
operation like a convenience store or fast-food restaurant, that should be
pretty obvious, but franchises can cover a wide variety of business types. If
you’re getting into a less familiar type of business, make sure you understand
the basic model for generating profits.

Beyond
that, you need to look at what makes that business unique. Imagine yourself
running the franchise, and ask yourself how you would sell it to customers. If
it’s a burger joint, for example, what makes it different from well-known
brands like McDonald’s and Burger King? Is it cheaper? Better quality food?
Better service? Why would a customer choose your business over another?

Check out
the demand for the products or services you’ll be selling, and how well that
demand is currently being served in your area. Sticking with the fast-food
example, you could count up all the existing fast-food restaurants in the area
you plan to open a franchise in, plot them on a map, and see what the coverage
is like. Are there any areas that are poorly served? If there are already
dozens of competitors, ask yourself if there’s space for your business to
thrive. Visit existing restaurants and see how busy they are. Maybe even do
some polls and customer surveys, asking people whether they’d visit your
restaurant.

The success
of a business, after all, is largely driven by the traditional laws of supply
and demand. If there’s a large demand for your product or service, and little
supply, you should thrive. If the balance is tilted towards the other end of
the scale, you’re likely to struggle.

Look at how
much money you’ll have to invest yourself, whether the franchisor will help
with additional financing, how much you’ll have to spend on buying or leasing
real estate and equipment, and what kind of support you’ll get in terms of
advertising and marketing. You want to estimate how quickly you can break even,
and gauge the long-term prospects for the business.

Step 2: Key Questions You
Need to Ask

Beyond
reading, of course, you need to ask lots of questions. Pay particular attention
to the source of any numbers or profit estimates you’re given, and don’t be
afraid to ask the franchisor for extra details. Here are some key questions to
ask:

1. How Long Have You Been
in Business?

A long
track record is no guarantee of success, but it should at least give you some
comfort. If the franchisor has been operating for decades, it’s more likely
that the business model has been refined and improved over time. If it’s quite
new, it’s not necessarily a red flag, but you’ll need to pay more attention to
the background of the key executives, and be a bit more skeptical about any
estimates or promises.

2. Can You Provide Earnings
Estimates, and What’s the Basis for Them?

Often,
franchisors will give estimates of how much you can expect to earn. But the
Federal Trade Commission warns that the numbers can sometimes be misleading. So ask them to substantiate any
earnings estimates—if they claim an average income is $100,000 a year, for
example, is that figure inflated by a few very large franchise units, or is it
truly what you can expect to earn yourself? How does the income vary by
location? If revenue figures are provided, ask for profits instead—you want
to know the bottom line.

3. What Training is Provided?

One
attraction of franchising is the support offered by the franchisor to newbie
franchisees. But the amount of training can vary widely, so you need to
understand exactly what’s being provided. How long does it last, and what form
does it take? Is there any additional cost, or is it included in the franchise
fee?

4. What Controls or
Restrictions Are There?

As we
discussed in the first franchise tutorial in this series, franchises often place
significant restrictions on what you can do, to enforce uniformity across the
brand. Make sure you understand what these restrictions are. Will you be forced
to buy particular products, or comply with design standards, and what will the
costs be? Will you be restricted from offering particular services, or from operating
in certain territories?

5. How Does the Marketing
Work?

Another
attraction of franchises is the ability to take advantage of a bigger brand
with name recognition and marketing clout. But check the details of how
marketing will work. Sometimes you’ll have to pay into a marketing fund, but
the publicity may not directly benefit your business. So ask what’s provided,
how much it costs, and whether it’s mandatory to keep paying in if you’re not
seeing results.

6. How Do You Resolve
Disputes?

You may not
want to start a business relationship by asking a question like this, but it’s
important to understand it. Disputes between franchisor and franchisees can
happen for any number of reasons, and you need to know what the process is for
resolving them. Also find out if there are any pending lawsuits against the
franchisor.

As well as
asking these questions directly, you can also research the franchise online,
for example by checking with the Better Business
Bureau to find out if there have been any complaints against it, or by
checking out the articles and forum discussions on a site like UnhappyFranchisee.com or BlueMaumau.org to find out about any negative
franchisee experiences.

Step 3: More Research You
Need to Do

Once you’ve
done your research and asked plenty of questions of the franchisor, it’s time
to interview other franchisees. The franchisor may supply you with some
references, but like any references or testimonials, they’re likely to have
been selected because they’ll say something positive. So by all means contact
the suggested franchisees, but also find some of your own.

A good
place to start is with franchisee associations. Sometimes these are sponsored
by the franchisor, but often they’re independent organizations, set up by
franchisees to give them a way of communicating with each other and advocating
for franchisees’ interests. Examples of franchisee associations are Domino’s Franchisee Association and National Jack in the Box Franchisee Association.

Contacting
these organizations is a good way to get information on the state of the
relationship between franchisor and franchisees, and to find out more about
what you can expect. You may also be able to make contact with individual
franchisees, so that you can interview them about their experiences.

Also check
the Franchise Disclosure Document, which we’ll look at in more detail in the
next tutorial. There’s a section in it where current and former franchisees are
listed, so you can track people down that way.

And if
you’re thinking of buying an existing outlet that was reacquired by the
franchisor, the FTC says
that the franchisor must tell you who owned and operated it for the past five
years.

Questions
the FTC recommends asking former franchisees include:

How long they
operated the franchise?

Where the
franchise was located?

Whether
they were able to open the outlet in a reasonable time?

Their total
investment, including any hidden or unexpected costs?

How long it
took them to cover operating costs and earn a reasonable income?

Whether
they were satisfied with the cost, delivery, and quality of the goods or
services they sold?

Whether the
franchisor’s training was adequate?

Their
satisfaction with the franchisor’s advertising program?

Whether the
franchisor fulfilled its contractual obligations?

Whether the
franchisee would recommend the investment?

Keep in
mind that some franchisees may be wary about giving out too many details of their
business, particularly if you’re cold-calling them. Think about how you’d feel in
their shoes, and think of ways to make it easier for them to help you. If
you’re asking about finances, for example, it may be better to ask generally
how much you can expect to make as a new franchisee, rather than specifically
how much they’ve made.

Step 4: Common Mistakes to
Avoid

Buying a
franchise can be a wonderful decision, but there are some pitfalls. Here are
some common mistakes to avoid:

Being in a Hurry

The
research we’ve outlined in this tutorial will take a significant amount of
time. It’s not always easy to find all the information you need, and locating
franchisees and getting them to talk to you can take patience and
determination. And we haven’t even covered the Franchise Disclosure Document
and franchise agreement yet.

But if you
rush all of this due diligence and cut corners with the research, you may find
yourself getting into problems. If you find that someone else is pressuring you
to hurry before the great opportunity passes you by, definitely push back and
insist that you need the time to do your own research.

Relying on Other People’s
Opinions

With pretty
much any investment, it’s dangerous to rely entirely on other people’s
opinions. By all means get recommendations from people you trust, but
ultimately it’s your money, your life, and your responsibility to get this
decision right. Ask for the rationale behind any recommendation you’re given,
ask for data and facts to substantiate it, and do your own research to verify
it. If you’re being advised by an expert, be very clear about what that
person’s motivation is, and whether it aligns with your own interests.

Buying a Good Franchise,
But One That’s Not Right For You

The
research you’re doing in this tutorial is not just aimed at helping you avoid
bad franchise businesses. It’s also aimed at helping you find the franchise
that’s right for you personally. You may come across a franchise that’s a
wonderful opportunity for someone,
but not for you. It’s important to return to the self-evaluation that you did
in the previous tutorial, and compare your own goals and needs against what the
franchise is offering. A franchise that offers big financial rewards but
requires a huge time commitment, for example, would be a dream for some people,
and a nightmare for others.

Looking for the Latest
“Hot” Opportunity

Sounds
exciting, doesn’t it? But remember that one of the main benefits of running a
franchise is getting access to a proven business model that’s generated profits
in good times and bad. A hot new opportunity means one that’s untested, and it
adds to the risk you’re taking on. If you really want to do something new and
exciting, why not launch
your own startup?

Conclusion and Next Steps

Buying a
franchise is a major life decision. Often you’re investing a substantial amount
of money upfront, and also tying yourself into running a business for a period
of up to ten years, with all the extra commitments of time, money and energy
that such a decision involves.

It’s a
decision that works well for many people, giving them greater financial freedom
and independence. But it can also be a way to lose a lot of money if you rush
into buying a franchise that turns out not to be right for you.

If you
follow the steps outlined in this tutorial, you’ll give yourself a much better
chance of success. You’ll understand the business plan completely, you’ll have
asked all the right questions, and you’ll know what to expect from talking to
existing franchisees. You’ll be ready to avoid some of the common franchisee mistakes,
and buy a franchise that’s right for you.

But your
work isn’t done yet. You still need to read and understand all the official franchise
documents, particularly the Franchise Disclosure Document (FDD) and the
franchise agreement. We’ll cover those in the next tutorial in our series on
buying and running a successful franchise.